Employers Add 175K Jobs in May; Unemployment Rate Ticks Up to 7.6%

The U.S. economy added 175,000 jobs in May, the Labor Department reported Friday, a bit of an improvement over April but providing little incentive for the Federal Reserve to scale back its long-running stimulus policies.

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The unemployment rate ticked a notch higher to 7.6%. Economists had predicted the rate would remain unchanged at 7.5%. But the uptick means more people have entered the workforce, a positive sign.

While the number of jobs added last month was slightly better than expected – analysts had predicted 170,000 new hires in May – it remained well below the 200,000 monthly figure most economists say is needed to push the unemployment rate steadily lower.

The report will likely only fuel speculation over when the Fed will begin scaling back its $85-billion-a-month bond buying program, known as quantitative easing.

Peter Cardillo, chief market economist at Rockwell Global Capital, said markets would likely respond negatively to either a big jump in job creation or a big falloff. A large increase in the number of jobs created would increase fears that the Fed will shortly begin tapering off stimulus, while a big dropoff would mean economic growth is slowing rather than picking up.

A number somewhere in between "should help calm markets," Cardillo said. And that’s just what they got.

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Stock markets moved higher in early trading after the release of the report. The Dow Jones average was up around 80 points minutes after the opening.

The Labor Department said the private sector added 179,000 jobs of which just over 57,000 were in the professional- and business-service category. Federal workers declined by 14,000 while municipal governments added 13,000 jobs.

The labor force participation rate, a key statistic for economists, remained essentially unchanged at 63.4%, a three-decade low. Still, the U.S. labor force rose by 420,000.

For weeks stock markets have moved up and down based on speculation by investors over when the central bank might start gradually reducing its bond purchases. Earlier this week, for instance, markets fell sharply because more than one Fed member has said publicly that bond purchases could begin to slow in the next few months.

However, stock markets have soared to record highs this year primarily because investors have felt confident the Fed would maintain its stimulus programs indefinitely, or at least until the U.S. economy had proven it could stand on its own.

“Ongoing economic growth is creating jobs at a reasonable rate, with an average of 172,000 over the past 12 months. The downside, of course, is that the better than expected (May) number will stir up increased talk of when the Fed might start to taper its current $85 billion per month asset purchase program,” said Chris Williamson, chief economist at research firm Markit.

Bursts of positive economic data -- primarily from the housing sector and partially from a handful of better-than-expected jobs reports -- has prompted some Fed policy makers to call for an end to quantitative easing sooner rather than later. The fear among that group of Fed decision makers is that the central bank’s easy money policies will eventually lead to runaway inflation.

Overall, however, economic data so far in 2013 had been mixed and Fed Chairman Ben Bernanke has maintained a non-committal stance on stimulus, saying repeatedly that the Fed could tighten monetary policy if the economy improves or ease even further if the economy fails to gain momentum.

Since the financial crisis of 2008 the Fed has initiated three rounds of bond buying programs and kept interest rates at historically low levels all in an attempt to spur economic growth. The belief is that low interest rates will spur lending and eventually spark economic growth.

The Fed has vowed to keep interest rates at a range of 0% and 0.25% until the unemployment rate falls to 6.5%.

The easy money policies seem to have worked in the housing sector. The Fed’s latest round of quantitative easing has focused specifically on that important sector and home prices have begun to climb in many regions around the country as demand has picked up.

But the labor market remains stubbornly sluggish.

Through late 2012 and into early 2013 the number of jobs created each month averaged about 200,000, the figure cited by analysts as a benchmark for chipping away at the unemployment rate. But the numbers have bounced up and down since March, when just 88,000 jobs were created.

The falloff has been attributed to a 2% payroll tax hike that took effect in January and took about $200 out of the average American paycheck each month, driving down consumer spending.

In addition, the $85 billion in mandated across-the-board government budget cuts known as sequestration which began in March is believed to have fostered a sense of uncertainty among businesses that could also have cut into hiring.